happycajun

Why Are Natural Gas Producers Expanding Production So Aggressively?

"John Galt" - sorry, I missed your irony initially! Where there is misconduct, by golly letstake the miscreants to task, conspiracy theorists - please stick to the authenticity of the moon landings, JFK, ect.

Madrejesica - oil & gas property rights are governed by state law, hence each state has its own set - but there is a significant similarilty in how the operating companies and landowners have approached the legal issues. Regarding the shut-in provisions, the typical lease provides for a "shut-in royalt" that holds the lease when a lease is shut-in awaiting facilities. Following is an example:

"should Lessee be unable to operate said well because of lack of market or marketing facilities or governmental restrictions, then Lessee's rights may be maintained beyond or after the primary term without production of minerals or further drilling operations by paying Lessor as royalty a sum equal to one dollar (1.00) per acre of land covered hereby per year, the first payment being due . . ."

There are a variety of general lease forms that have been used over time, and you must read each one to make sure what it says! If you have a significant sized tract (forty acres or more) you would be well advised to have an oil & gas lawyer take a look at things for you before you sign. My VERY generalized explanation above is just that - generalized. Whole legal treatises on the subject of Oil & Gas law such as "Williams and Meyers" (which my old friend Pat Martin edits) are written on the subject, so this is an over-simplification at best!

Why Are Natural Gas Producers Expanding Production So Aggressively?

Mr Galt, I'll tell you were they get these people.

The majors recruit the finest engineering, geology and mba programs in the world, looking for the best potential. I have known many with undergrad degrees from US Naval Academy, US Military Academy, Texas, Texas A&M, Rice, Oklahoma, MIT, Harvard, Michigan, Penn, Duke, Purdue - just to name a few who I know who made it to the top ranks of E&P businesses. They then put them in the trenches - ALWAYS analyzing the economics of any investment decision. ALWAYS. The independants tend to hire from the majors - because the majors are better able to afford to train and develop the raw recruit. The young professional is taught about legal and regulatory aspects of the business - and HEAVILY INDOCTRINATED to NOT do anything wrong or unethical. I know some armchair quarterbacks will jear this assertion, but the majors all have a culture of being ethical, honest businesses - WAY more so than what I have seen from the wallstreet financial crowd.

There some bad apples, as in any business, but after the last great oil boom/bust, and all of the scrutiny focused on the industry over the nearly forty years I've been around it - the culture is shareholder focused, while operating legally and ethically. Anyone have some specific factual charges - take them to the SEC.

Why Are Natural Gas Producers Expanding Production So Aggressively?

First, a technical correction - you don't "pump" natural gas (or any vapor phase material), you compress it. Gas wells flow or they don't flow - you don't pump them. If the pipeline pressure that you have to overcome to get the gas into the pipeline is higher than the wellhead pressure, then you add compression at the wellhead, downstream from the separators.

Second - the "why" wells are being drilled with prices down is more complex than you characterize. One must look at oil & gas law and how mineral rights are acquired to understand why an oil or gas lease is a "use it or lose it" proposition. When a landowner leases his/her minerals, it is by way of an agreement in written form that stipulates that the lessee has a limited amount of time to drill a well, or the leasehold rights revert back to the land owner. In the Haynesville, for example, it common for leases to provide that the lessee must drill a well in two years, or the lease goes away. There is usually an option to "renew" the lease for an amount of money generally equal to the original lease payment or "bonus" that was the consideration for the lease initially. The lease bonus in the Haynesville has been in the $5,000 to $10,000 per acre range generally. If gas and condensate are produced, then the lessor gets a percentage of the gross production at the wellhead, typically 25% of the volume - which the producer generally markets for the owner, who then gets the $$ that his 1/4 of the gas is sold for.

Now, to put this in an economic context. The basic "unit" being formed in the shales is the section - or a 640 acre nominally square area. This unit is developed by a single horizontal well that is spudded (the surface penetration of the drill bit) near the center of one side of the square, and which goes down vertically to the shale formation, then "kicks" horizontal and runs about a mile - this is the section of the well that is "completed" - where the gas flows from the rock into the tubing, then to the surface.

The lease bonuses for 640 acres is a sunk cost of about $3 - 6 million. A well costs a little more than that. If you don't drill, you lose the lease, or have to pony up another $3-6MM to hold the lease - which you will still lose if you don't drill - all you are buying is time. Having shelled out the $$$ for a lease, and or for a well - it is simple matter of cash flow that you have to generate revenue to produce some return on the investment. The lease also has shut in provisions, which require that a lease be produced once a well is drilled, or it reverts to the land owner - if a lease is shut in more than thirty days - you can lose the lease.

The above is much simplified - but it shows that the economics and risks are more complex than you characterize. This is why the upstream E&P business is best analogized as a game of stud poker - you have to ante up at each stage of the game, and you don't know if you have won or lost until the last card is dealt.

Oil Is Still the Key to U.S. Economic Future

Nice article Fitzman. The shale plays & the horizontal drilling/completion technology ushered in with the shale plays will keep natgas price decoupled from oil (or at least very loosly tied) at historical ratios. Another factor is LNG - a significant amount of import capacity has been sited, predating the shale plays, and will contribute to supply side.

Exxon Misses as Production Drops

This is a harbinger telling what the future holds for our current oil "surplus." Oil, more so than gas, is very sensitive and responsive to price. Oil has a higher lifting cost which increases with maturity of a field. Gas on the other hand is much easier and less costly to produce once the well is completed. This means that an oil well will be plugged and abandoned when price drops below a certain threshold because the cost of operating it exceeds the revenue it produces - no positive cash flow. A gas well is cheaper to run. Once it is on stream, it does not have a high direct operating expense, so with the sunk cost of discovery and developement behind - it will continue to operate at bargain basement gas prices because it continues to create positive net revenue - it produces cash flow. Over the slightly longer term, capital expenditure drops because there is less cash flow to reinvest in finding and developing new resources, which are always ranked by marginal develpment cost - the cheaper barrel equivalent of reserves gets developed first..... but over time, the barrel has gotten more expensive to put on the proven producible reservse books. Deeper water, more remote areas, smaller deposits, less desirable chemical composition, etc.... are all factors that push a barrel of reserves out in time, until the price goes up.

So, it is inevitable that the current low prices will result in less exploration, less development, less reserve replacement, continued depletion, and ultimately - less oil available..... and higher prices. If Exxon's stats show it after less than one year of seriously down prices - it is true of the industry at large - simple Oil & Gas Econ 101.

Oil and Gas Producers Spending Enough to Grow Production Through 2010

Hey! If you are talking about the handful of pinksheet listed E&P's that you mention having access to enough capital to "grow production through 2010" that is one thing.... for the whole E&P sector to "grow production through 2010" is a whole 'nother fantasy! Just ain't happening. Regarding "decline rates kicking in," I'm not sure what Mr. Daunheimer is implying, but the basic depletion mechanics of a well are complex and depend a large number of factors, with drive and lift mechanisms being two principal issues in an oil well. Most oil wells will be most productive in their first year of operation, and the rate of production commences to decline at an exponential rate. Thus, the rate of production will drop more in the first year than in the second - etc... Again, this depends on drive and lift, but in general, it is how oil wells age. Thus, "decline rates" kick in most significantly at the beginning of a well's life - if there is no cap-ex, then there will be decline, and it will be more significant in the early life of a field.

Many old fields that were super giants in their day continue to produce at MUCH lower rates for years after their prime days. I remember when we shut in the Dammam #7, I think it was in 1982, in Saudi. The #7 was the first successful commercial well in Saudi, drilled in 1938 and produced pretty much continuously for 45years. The Dammam field was shut in because it only produced about 30,000 barrels per day, and with a crude glut, the old GOSP and related facilities needed more capital improvement than the marginal production would justify!

Will the Clean Energy Economy Become the Next Internet?

Next Internet? More likely the next Ostrich farming craze. Seriously, Konrad makes a lot of sense, the internet was all about "ideas" and things that were very capital lite - vast undeveloped markets for things not being done before (selling over the web - people actually sitting at a computer for reasons other than work, etc.) whereas the "energy" market is very mature. Efficiency is indeed the low hanging fruit - just as it was back in the '70's energy crunch. I remember crunching economics an a bunch of capital projects dealing with improved energy efficiency, every thing from adding insulation to hot or cold processes, to improved process control and waste heat recovery additions or enhancements. Alternative energy sources have MASSIVE inertia to overcome - dealing with replacing installed bases that "ain't broke" is always difficult. The "technology" in impact in energy is not the same as it was in the internet boom, short of some cold fusion type breakthrough.

Exxon Ups the Algae Ante Big Time

Mad - while I generally hold the old ER&E organization in high regard, I certainly don't think that if Exxon does it, it must be a good business move. I am old enough to remember the last boom, when they bought Emerson Electric (on the belief that high efficiency motors would be part of the future with electricity replacing internal combustion engines in many applications) and zilog (the Z80 CPU chip that was actually much better situated than the Intel 8080 of the day, and word processing.... and Mobil bought Montgomery Wards. The lesson learned was not that any of those weren't important businesses of the future, but that they were departures beyond the "core competencies" of the Exxon and Mobil cultures.

As a biofuel source, algae has much greater potential than corn or sugarcane on a BTU/acre basis - but it also depends on some rather significant basic science breakthroughs, and some major "developemental" hurdles. Exxon Mobil certainly has an outstanding ability to fund such fundamental research. In today's world, any commercial attempt would probably be spun off to a contained business unit of the company that could be severed, or operated rather autonomously. But any way you slice it - biofuels has very little potential to make a major dent in our future energy needs - the numbers just aren't there. As such, I think this is as much for publicity as it is to produce energy from alternative sources.

Laying the Foundations for a Post-Oil Age Economy

Huhhhh? Ever been to London? Yep, well laid out..... What IS the post oil economy? I thought that technology will make energy cheap, clean and abundant - which means attempts to further concentrate populations into potential death traps for natural or manmade plagues won't be driven by energy. And further, if you further concentrate population, who will produce all of the food (and renewable energy) that these slums will need? Waste disposal? Crime? An what about all of the existing "sprawl?" Do you advocate what the dicatator Napoleon did in Paris - bulldoze the whole thing and start from scratch? Sounds like you are a "mass transit" agenda guy, and you don't address what all those sheep in the superherds will be doing for a living. I thought that all this technology was to enable telecommuting and such. Indeed, I work all over the globe frome whereever I am. I thought that one of the environmentally sustainable trends was to consume locally produced "stuff" rather than to ship crap from Hong Kong to NYC for consumption of "fresh" produce. Sounds to me like you need to do a little more work on problem definition before you launch your "foundation" for the Oil Free (ha!) future.

Rising Oil Prices: What We Have to Do ASAP

The real issue regarding energy cost is stability. For the longer term, yes - we will need to come up with a replacement for oil and gas - but it won't be overnight, and the "how" is still being worked out by the markets. Oil shot up - some blame "speculators" which I don't really understand because ANY investment is speculative. The base premise of portfolio management is that the future is uncertain - making investment risky - the trick is to determine the degree of risk and to place your bets so that your exposure is understood and fits your risk tolerance.

If Oil at $147/bbl was "too high," then it seems that Oil at $30/bbl was perhaps "too low." As with most things, when a stable trajectory is disturbed, there is an overshoot/hunting response to the disturbance, with a new stable "steady state" being the result. The new stable basis gets priced into the economy. Oversimplified, but basically how dynamic systems respond to impulses. Now, for your recommendations:

Beg OPEC - What? This is a real winner! Beg for what? Stability? Low Prices? High Prices? Alternative Energy Technologies? The only common ground here that makes any sense is "Stability" - OPEC wants it (or at least Ali Naimi/Saudi wants it), but at what level? $70-$80 is the stated happy equilibrium.

Use the SPR - This option makes a little sense when the price is at extreme levels (produce from when price swings too high, add too when price is too low), but not when the price is seeking some intermediate ground. the SPR is NOT a permanent, limitless supply.

Expand Transit system service IMMEDIATELY? How? the problem in most cases is that people don't use it! With gasoline/petrol at relatively low prices, this won't get people on the tube.

Expand Bus service? see above. Have you been to a bus station lately? Unless you are a police officer I doubt it! There is no quick way to make this ANY more attractive (less unattractive?) than it is.

Increase Gas Tax? I thought you said the price was TOO HIGH! Good move, let's MAKE IT HIGHER!

Encourage some sort of "commute efficient" practice by employers - this was done to VERY limited effect back in the '70's energy crunch, and it can have some impact, but not permanent, and I don't understand what "salary subsidy" for the workers results in any incentive for the EMPLOYER to change work days?

"Should have been preparing for this" - well, can't fault you there. I said this THIRTY years ago. All that's changed is the clowns in charge, the circus is the same.

U.S. Policies, Especially Energy, Should Be Much More Strategic

Hi Alan, I met Matt several years ago when he was on the board of Kerr-McGee. As you & I have both personally experienced, the "oil patch" suffered a great depression between 1985 and 2000 that makes the current general economic setback look like a mere correction. More than half of the oil & gas professional population permanently left the industry, and the university programs in petroleum geology and petroleum engineering were decimated. Only recently have Pet E programs started to garner interest from folks other than South American and Middle Eastern nationals who intend to return to their homelands for a career. I know a number of physicians and attorneys who have degrees in petroleum engineering and geology from the late 1980's.

Jimbo - doublegun answered you question quite well - I don't trust government to allocate funds efficiently. Never have and never will. When it comes to "incentives" I prefer some form of tax credit or special deduction which prevents the funds from flowing through the politician's sticky fingers. I also firmly believe that "incentives" should be a catalyst that facilitates some initial resistance then goes away. If the economics are terminally bad - then as my daughter would say - DOHHH let's not do it! If the economics WILL be there once the inertia is overcome to get things rolling, then MAYBE an incentive is a good idea. Many have seemed to confuse incentive and subsidy (or as we used to say a HANDOUT).

U.S. Policies, Especially Energy, Should Be Much More Strategic

Son, you are clueless if you consider slapping a tax on any commodity a "strategic" step. At best, such a move would be considered tactical, albeit foolish. At bottom, energy is a component of all production. To the extent that a tax is placed on a form of energy, that tax becomes a part of the cost of production. Because other players in a global economy (the Chinese?) do not add this element of cost into their cost of production, they have an advantage. At the moment, the supply of oil and natural gas is more than adequate, but the US economy is in a major recession. NOW, you advocate the brilliant STRATEGIC step of slapping a major tax on a fundamental commodity? Nice "strategic" plan ace.

Traffic Congestion: Who Deserves to Get $50K?

and who decides these weighty issues? government bureaucrats? Read some of Ron Coase's works, this sort of thing should be self regulating. The congestion of which you speak introduces its own "cost" as it is, and less traveled paths that are more efficient attract traffic. State and federal politicians are already rather proficient at funding bridges and highways to nowhere - a commission that "taxes" use of publicly funded infrastructure, especially one that uses "data" to make such decisions has much room to become very corrupt. Lets not advocate more bureaucratic control komrad.

Peak Oil as a Function of Earth's Volume

This is hilarious! Are you a "strategic planner" for the DOE perchance? LOL!

Saudi Khurais Field: Looks Like Easy Oil May Be Gone from Arabia, Too

Khurais was discovered way back in the '50s, when Aramco was trying to get a handle on just what they had potential-wise in the consession area. They were obligated to cede back to the government acreage over time, and so they were actively trying to determine where there wasn't oil so to speak. Khurais, and later Shaybah, were examples of fields that were high potential, but just too far from the core areas to justify putting in the infrastructure to fully develop when there was so much productive capacity to be produced at a lower marginal cost. Khurais was initially developed on a very limited basis solely to supply crude oil to the government's Riyadh refinery - Khurais being the closest field to that facility. In 1983, I remember when we tapped the 48" crude line that delivered oil to Yanbu on the Red Sea coast for feed to the refineries there, and for export via the Red Sea and Su-med pipeline in Egypt. The economics of using the Pipeline and tankers from Yanbu for export were inferior to using tankers from Ras Tanura, so there was much extra capacity (the Yanbu line was always justified on feeding local development on the west coast of Saudi and on security).

The Yanbu line then was used to feed crude to Riyadh by way of the goverment's pipelines that previously carried Khurais production, and Khurais was "mothballed" for future development. It is only relatively recently that Khurais was properly delineated, and full field development undertaken. As I understand it, the formation oil pay is not as thick nor uniform as originally thought based on extrapolation from Ghawar. Ghawar has been on seawater injection for at least the last 25 years - my memory is a little hazy that far back - it is just the nature of those giant fields, you want to use water injection for pressure maintenance to maximize ultimate recovery - producing without such a mechanism with the the light oil in place would damage the reservoirs early on.

Long story short - I don't think Saudi would be developing Khurais unless it needed incremental capacity to maintain max output in the 10 to 12 million barrel range. Ghawar has been extended by horizontal drilling and improved control. Khurais is by all means a giant oil field, but not as rich as earlier thought to be.

Regards, HC